Gray Market Goods: Material Differences Measured Against What?

The issue of "gray market" goods has plagued the courts for decades, with courts struggling to define the rights of trademark and copyright owners. In the trademark area, the courts have coalesced around the rule that goods produced for sale outside of the United States with a U.S. trademark owner’s consent, when imported, will be considered infringing only if those "foreign" goods materially differ from the trademark owner’s goods sold in the United States. In other words, when "foreign-directed" goods possess different characteristics from the U.S. goods, then the foreign goods will be considered infringing, even though both products were produced with the U.S. trademark owner’s consent.

What constitutes a "material" difference, of course, varies from product to product. For example, TIC-TAC breath mints were found materially different based on differing caloric content, size, packaging, labeling and chemical composition.1 Similarly, PEPSI-COLA bottles marketed in Mexico were found materially different where the labels were in Spanish, the bottles did not list the ingredients, and the packaging and shipping rendered the Mexican bottles susceptible to leakage and product deterioration.2

In Bourdeau Bros. v. Int'l Trade Comm'n,3 the Court of Appeals for the Federal Circuit noted a caveat to this rule, holding that goods do not materially differ if the U.S. trademark owner has permitted foreign-directed products to be sold in the United States such that "all or substantially all" of the U.S. sales are not, in fact, the U.S. version of the product. Deere & Company had brought this case under 19 U.S.C. §1337 before the U.S. International Trade Commission. The Administrative Law Judge (“ALJ”) had held in favor of Deere, finding that there were clearly numerous, material differences between the forage harvesters sold by Deere in the U.S. and the European-directed versions of these forage harvesters, including differences in the safety features, the language in which the operator's manuals were written and the services offered with the machines. While the respondents presented evidence at trial demonstrating that Deere had authorized sales of these European version forage harvesters within the United States, the ALJ placed the burden of proof upon the respondents to establish that Deere had authorized those sales and that the numbers of such sales were substantial.

In reversing the decision, the Federal Circuit first explained that the fact that Deere exported from the United States these European versions was legally irrelevant. The Court reasoned that neither Section 1337 nor the Lanham Act distinguishes between goods produced in and exported from the U.S. and goods produced outside the U.S. In either case, the issue is whether the trademark owner has consented to the importation of the goods and has control over the characteristics of the goods associated with the trademark in the United States. Second, the Court affirmed the ALJ's finding that there were material differences, noting that even the respondents acknowledged most of the differences and argued only that “substantial evidence” did not support the finding that these differences were “material”. The Court quickly disposed of that argument, noting that those differences included safety features.

Third, notwithstanding that the respondents had raised the issue as an affirmative defense, the Court observed that the burden of proof was on Deere to establish a prima facie case that “all or substantially all of its sales” in the U.S. conformed to the U.S. version of the forage harvesters. In other words, Deere must first establish the U.S. standard against which the alleged material differences of the European-version were to be measured. Thus, Deere must prove by a "preponderance of the evidence" that it did not authorize in the United States the sale of the European-version of the forage harvesters through its own authorized dealers or, if it did, then consistent with the Federal Circuit's earlier holding in SKF USA, Inc. v. Int'l Trade Comm'n,4 Deere must then prove that "all or substantially all" of the foreign harvesters sold in the U.S. with its consent conformed to the U.S. standard. Accordingly, the Court remanded the case to the ALJ for further proceedings wherein Deere would have the opportunity to demonstrate either that it had not authorized the sales in the U.S. of the European-version harvesters or that those sales represented only a small portion of all sales authorized by Deere in the U.S.

The Federal Court’s decision reaffirms that material differences may render gray market goods infringing but also recognizes that gray market goods will be permitted in the United States where the trademark owner does not differentiate between its U.S. and non-U.S. markets.